(2011-S2) - FINS3616 - Tutorial Slides - Week 11 (condensed)

(2011-S2) - FINS3616 - Tutorial Slides - Week 11...

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TERNATIONAL BUSINESS FINANCE INTERNATIONAL BUSINESS FINANCE FINS3616 torial Tutorial Week 11 Chapter 17 & 19

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HAPTER 17 — ROBLEM 1 A proposed brewery in the East European country of Dubiety will CHAPTER 17 PROBLEM 1 produce a beer—dubbed the “Dubi dubbel”—for Grolsch N.V. of the Netherlands. number of other Western European brewers have announced plans A number of other Western European brewers have announced plans to produce and sell beer in the Dubi market. too many breweries open, beer prices will fall. If too many breweries open, beer prices will fall. If some of these investment plans do not materialize, prices are likely to rise. The price of beer is determined exogenously and will be known with certainty in one year. Grolsch management must decide whether to begin production today or in one year. The following facts apply… 2 FINS3616 — Peter Kjeld Andersen
HAPTER 17 — ROBLEM 1 CHAPTER 17 PROBLEM 1 The following facts apply… Initial investment: I 0 = D200,000,000; rises by 10% each year Actual price of beer in a year: P 1 = either D25 or D75 with equal probability Expected price of beer: E[P 1 ] = D50 Variable production cost: D10 per bottle Fixed production cost: D10,000,000 per year Expected production: 1,000,000 bottles per year forever x rate: % Tax rate: 0% Discount rate: i = 10% 3 FINS3616 — Peter Kjeld Andersen

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HAPTER 17 — ROBLEM 1 Q. Draw a decision tree that depicts Grolsch’s investment CHAPTER 17 PROBLEM 1 decision. Invest today vest if Price = D75 0 NPV ? = Wait one year then invest Invest if Price = D75 0 beer NPV | (P D75) ? == Invest if Price = D25 0 beer NPV | (P D25) ? 4 FINS3616 — Peter Kjeld Andersen
HAPTER 17 — ROBLEM 1 Q. Calculate the NPV of investing today as if it were a now-or- CHAPTER 17 PROBLEM 1 never alternative. 11 F [ ] ( ) EP VC Q FC −× [ ] EP = ( ) ( ) P=75 P=75 P=25 P=25 Pr PP r P + = ( ) ( ) 75 25 22 + = D50 0 NPV = 1 CF Cost WACC −= Cost WACC 50 D10 1 000 000 D10 000 000 × ( ) D50 D10 1,000,000 D10,000,000 D200,000,000 0.10 =− 100 000 000 D100,000,000 = 5 FINS3616 — Peter Kjeld Andersen

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HAPTER 17 — ROBLEM 1 Q. Calculate the NPV of waiting one year before making a CHAPTER 17 PROBLEM 1 decision 0 NPV = () P=D75 0,(P=D75) P=D25 0,(P=D25) Pr NPV Pr NPV + inflation NPV = 11 D75 D10 1,000,000 D10,000,000 D200,000,000 1 0.10 0.10 0 1 0 10 1 0 −× + + ( ) ( ) .10 1 0.10 ++ discount rate D500,000,000 D200,000,000 D300,000,000 =−= Because investment is delayed one year NPV = ( ) D25 D10 1,000,000 D10,000,000 D200,000,000 1 0.10 0.10 1 0.10 1 0.10 + D154,545,454 =− 1 or ZERO as you wouldn't invest Ask yourself what would happen in the previous two question if the expected
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(2011-S2) - FINS3616 - Tutorial Slides - Week 11...

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